Knight-Swift Transportation Holdings Inc (KNX) 2017 Q3 法說會逐字稿

Good afternoon.

My name is Charles, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Knight-Swift Transportation Third Quarter 2017 Earnings Call.

(Operator Instructions)

Speakers for today's call will be Dave Jackson, President and CEO; Kevin Knight, Executive Chairman; and Adam Miller, CFO.

Mr. Miller, the meeting is now yours.

Thank you, Charles.

Good afternoon, everyone, and thank you to those who have joined the call.

We have slides to accompany this call posted on our newly developed investor website, which is investor.knight-swiftinc.com/events.

Please note, this is a change in web address as this site is new and different from the address we had provided in the past.

First off, we'd like to welcome you to the Knight-Swift Transportation's Third Quarter 2017 Earnings Call.

We are excited for this opportunity to report the financial results for the first time for this newly formed entity.

Our call is scheduled to go until 5:30 p.m.

Eastern Time and will be structured similar to our calls in the past.

Following our commentary, we hope to answer as many questions as time will allow.

If we are not able to get your question due to time restrictions, you may call (602) 606-6349, following the call and we will return your call.

During this call, we plan to cover topics and any questions specific to the results for the third quarter, provide an update on the merger and synergy initiatives as well as provide our future outlook on the markets.

(Operator Instructions)

To begin, I'll first refer you to the disclosure on Page 2 of the presentation.

I'll also read the following.

This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict.

Investors are directed to the information contained in Item 1A Risk Factors or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results.

Actual results may differ.

Before we jump directly into our third quarter results, I'd like to provide an update on our external reporting structure, expected to begin in the first quarter of next year.

Let's move on to Slide 3.

As we move to the closing of the merger, we are currently assessing our reporting structure, along with our externally reported segments.

The reporting of this year's third and fourth quarter will most likely remain consistent to the manner which Knight and Swift have reported in the past.

For example, Knight will report results on its trucking and logistics segment, whereas Swift will provide results for its truckload, dedicated, refrigerated and intermodal segments.

We will be performing a full review of the reporting structure, and any potential changes to the structure will most likely begin in the first quarter of 2018.

At that time, if any changes are deemed appropriate, we'll provide a prior year to -- a prior 2-year re-casted results reflective of any change.

Hopefully, this will help many of you as you update your models accordingly.

As it relates to EPS, both a GAAP and adjusted EPS metric will be provided going forward.

As I'm sure you can appreciate, we view these integration efforts as a top priority and are fully committed to the successful transition.

Our leadership teams continue to work together to identify both revenue and cost synergies between both companies.

As we work through this process, we will refrain from providing earnings guidance until we feel it is appropriate.

So with that, I will now recap our third quarter results, starting with Slide 4.

As in quarters past, the table above compares third quarter revenue and earnings metrics on a year-over-year basis.

An important item to note, however, is that due to the accounting requirements associated with the merger transaction such as ours, 2017 figures include Knight Transportation's full third quarter results combined with 22 days of Swift Transportation's third quarter results dictated by the merger close date, which was the end of the day on September 8.

2016 figures represent Knight Transportation's historically reported results.

Due to these unique circumstance, year-over-year comparisons at the consolidated level are less meaningful.

The basic and diluted share count also only represents 22 days of Swift.

Please refer to the most recently filed S-4 for an estimate of the share count moving forward.

We have provided adjusted financial information that excludes merger-related expenses, amortization of the intangible associated with the merger as well as software impairment, which is recognized within the third quarter.

We believe the comparability of the above results is improved by excluding these expenses that are unrelated to our core operations.

Adjusted operating income increased 19.2% year-over-year to approximately $44 million, while our adjusted earnings per share were $0.25 compared to $0.29 in the same quarter last year.

Now on to Slide 5. Our third quarter consolidated revenue, excluding trucking fuel surcharge, increased dramatically year-over-year due to the addition of Swift's 22 days of revenue.

Excluding the revenue related to Swift, our revenue excluding trucking fuel surcharge, increased 1.5%.

Adjusted net income increased 7.3% to $25.5 million.

We continue to experience a tightening market in the third quarter and remain confident capacity will become more constrained over the coming quarters, allowing us to increase the productivity of our fleet and improve our overall yields.

Turning to Slide 6. We view a strong balance sheet as a competitive advantage.

We're also the leader that provides operating strategic flexibility.

Following the merger, our net debt is $824 million and our shareholder equity is $4.8 billion.

We feel that debt level is very manageable and have plans to delever going forward.

At the end of September, we successfully closed on a new credit facility, which will reduce our annual interest expense by roughly $2.7 million going forward.

As of the end of the third quarter, we have built up cash and cash equivalents of $136.4 million and expect to increase the free cash flow generated by the company.

We would plan to deploy this capital towards accelerating, deleveraging, capital returns as well as future growth initiatives.

I will now turn it over to Dave Jackson.

Thank you, Adam, and welcome to everyone on the call today.

I'll now turn to Slide 7. In the third quarter, our Knight Trucking businesses operated at an 85.9% operating -- or adjusted operating ratio, which is about a 280 basis point increase compared to the third quarter of 2016.

The change in operating ratio was primarily driven by a 3.9% decrease in miles per truck during the period, increased driver-related cost and a year-over-year decrease in gain on sale of used equipment.

Revenue, excluding trucking fuel surcharge within our trucking segment, decreased 4.2% during the quarter.

However, our revenue per loaded mile increased 4.6% when compared to the third quarter of 2016.

Our nonasset-based logistics segment produced a 93.5% adjusted operating ratio, which is an 170 basis point improvement compared to last year.

This improvement was the result of both an 11.5% increase in our brokerage revenue and a 180 basis point expansion in our brokerage gross margin.

In total, our logistics segment revenue increased 8.8% year-over-year.

Now on to Slide 8. Due to the accounting of the merger, quarterly year-over-year comparisons for Swift are unavailable.

The table above represents Swift's results for the 22 day period post-merger close.

On a September-over-September comparison, our Swift Trucking segment produced a 2% increase in its revenue per loaded mile as well as a 2% increase in its weekly loaded miles per truck.

Our dedicated segment increased its weekly revenue per truck 4% due to a 4.6% increase in its weekly loaded miles per truck.

Our refrigerated segment's weekly revenue per truck decreased 0.009%, driven by a 2% decrease in its weekly loaded miles per truck.

This decrease was partially offset by a 1.1% increase in revenue per loaded mile.

The results within our intermodal segment displayed above do not represent our actual run rate within the segment, as the last 22 of September proved to be a more profitable time period during the quarter.

We are focused on improving this business by increasing our operational efficiencies.

Now on to Slide 9. As you can see, the freight market hit a strong inflection point in the second quarter of 2017, which continued in the third quarter.

Over time, the Knight and Swift rate for mile trends have been directionally similar.

Knight rates historically have tended to move with greater volatility due to a higher percentage of uncommitted capacity, less dedicated contract business and specific tools that we've employed.

Swift rates are improving and the improvement has accelerated in recent weeks.

In terms of trends during the quarter, the year-over-year increase in yield improved in each month of the quarter and into October for the Knight fleet and improved during September and October in the Swift fleet.

Each brands create significant value for the supply chain.

Swift creates more value for customers than any other truckload provider by a wide margin.

Now moving on to Slide #10.

Knight and Swift will continue to operate as separate operating companies with distinct brands and distinct management.

As a result, we expect little to no change for customer and driver-facing activities.

There may be some areas that work closely together to support our operations and we're confident these opportunities will continue to manifest themselves over time.

We believe execution on a per load, per truck or per service or terminal basis remain as the foundation for achieving a low operating ratio and our experience has been that visibility to the right measurements at the right time in the hands of an appropriately empowered manager can meaningfully accelerate improvement.

We plan to leverage the freight market knowledge of both organizations, improving the lanes and loads each company chooses to serve and the degree to which each is willing to commit capacity through contract and noncontract opportunities as well as remain extremely focused on our synergy efforts, which we expect will produce positive results in yield and expense reduction.

We also believe that accelerated development and implementation of technology will be one of the direct benefits from the collaboration between these two companies.

Each company has projects at various stages of development and implementation that will enhance visibility for our customers, improve the driver experience, streamline employee efficiency, improve asset productivity and improve our partnership with third party capacity providers.

Utilizing this technology throughout both companies is a top priority.

I'll now turn it over to Kevin Knight to cover the next slides.

So on to Slide 11.

Thanks, Dave and Adam.

As we mentioned earlier this year, when we announced our intent to merge with Swift, we expected to realize $15 million in synergies from the time of the merger close to the end of 2017.

We have seen success in these efforts and had been very pleased with the response and participation we have received from both Swift and Knight employees.

We fully expect to realize this $15 million by year-end.

We also expect these synergies to increase to $100 million and $150 million in 2018 and 2019, respectively.

These figures will come from both yield improvement and expense reduction.

Now on to Slide 12.

We've had synergy teams represented by both companies working together since the announcement of the merger.

Since the close of the merger, I have spent the majority of my time at Swift working to improve Swift's operations.

Some of Swift's executive leadership chose to move on.

Those that have remained are as energized and engaged as I have seen.

We also have a strong group of leaders from Knight at Swift now supporting or filling leadership roles.

Everyone seems to be working well together.

We have established stretched internal goals for improving operating profit at Swift in each line of business.

I am energized as we all work together to achieve those stretched goals in the coming quarters.

Our strategy at Swift is to create significant value for our customers in the full truckload space.

This will lead to a premium yield profile for Swift.

We will also be focused on reducing our costs to support higher profit and greater returns.

We will now open up the line for questions.

(Operator Instructions) Your first question comes from the line of Brad Delco from Stephens, Inc.

Dave, this is for you and probably Kevin, and I'll try to keep this to my one question.

We've seen a remarkable inflection in just the truckload industry over the last, call it, 6 months since this deal was announced.

Now I imagine there's been a lot of puts and takes internally in terms of what you've been able to execute on and what challenges may have come as a result of the market getting as tight as it has, most notably the driver market.

If you take a step back, can you kind of walk us through how your outlook of this merger has changed over the last 6 months in light of what we've seen and happened in the truckload industry?

Okay.

Now, Brad, I'll give you my best shot here and Kevin may have some thoughts as well, of course.

This is a transaction, and we may have alluded to this when we made the announcement about it back in April, that this was attractive for a number of reasons that go well beyond just market timing.

And so this was not positioned as a play on in inflection.

This was a long-term plan in terms of what we thought we could do over time.

So the goal for us at -- with this transaction, is to help Swift to achieve a cost-per-mile performance that they're capable of.

We haven't found any barricades that would prevent Swift from achieving a cost per mile that we think can put them in the low 80s in the regular truck route market and that will lower OR and all of the other operating entities that they have.

And then we continue to see unbelievable value that Swift provides to their customers.

And so we're looking at this for the long term, what we know is it's a cyclical business and so we happen to be in a time where it's going to be a very positive cycle, but we know that there's a chance that someday in the future, it's -- we're not on the upside of a cycle.

And so the plan is to help Swift be a very healthy business that earns a double-digit return on invested capital, both in good times and in bad.

And so, we definitely welcome the market developments that have happened over the last 6 months.

And honestly, we wish we could have closed this deal a little bit sooner to be in a better position perhaps for the kind of where we are in the inflection point.

But hopefully, that answers your questions.

Do you have anything to add?

I would say, Brad, it was disappointing that it took us until September to close the transaction.

In the improving market, it would have been good to have been able to go to work a month sooner.

But nonetheless, I would say we're making up that ground rapidly and I think those, I think, that we all have to remember is Swift and Knight provide different values to the market, and I don't want everybody to think that the way we're going to do it at Swift is the same way that we do it at Knight.

Knight is more of a noncontract player and Swift is more of a contract player.

Now, hey, through this merger, we'll both do better at each, working together.

And I would just reemphasize with Dave, I am just amazed at the value that Swift provides for their customer base and I'm really excited to be a part of that.

As Dave mentioned in one of his slides, there's nobody that provides more value in this space to its customers than Swift.

So I would say we're well on our way of getting there and going there.

So I don't really have any major disappointments.

I mean, as we know, the driver recruiting front is as difficult as we've seen.

And during this transition period, that's an area where Swift didn't perform very well and -- but I will tell you, in the last couple of weeks, it feels like we've got our legs under us and our numbers are improving significantly in that area.

You have to remember, Swift is -- it creates amazing value through their driver academies and their driver development capabilities.

And so about 75% of their new hires come through that program and 25% come through experienced recruiting.

And at Knight, we're just opposite of that.

We're about 75% on the experience side and 25% through our academy and training program.

So that -- the driver recruiting area is probably one that I wish was producing at higher levels right now, but I do -- I have seen in the last couple of weeks and you've got to remember, we've only been in there, gosh, 7, maybe 8 now, maybe 8 weeks now.

And so to stabilize that and to get it moving in the right direction feels good to me.

So those were my additional comments, Brad.

Your next question comes from the line of Tom Wadewitz from UBS.

I wanted to see if you could comment on where you think the fleet will be?

I guess we've seen some decline in the legacy Knight fleet, which has been uncharacteristic.

Obviously, the driver market is pretty tough.

But how should we think about that going forward?

And I don't know -- I didn't see driver -- I didn't see tractor accounts in either on Swift to note that you saw any kind of change in the Swift tractor count either kind of during September.

But just some kind of thoughts on maybe how we ought to think about fleet size given that you've seen some decline, I think, relative to the tight market.

Yes.

I would say, Tom, that we'll kind of maybe address the 2 fleets, maybe a little bit separately.

So from a Knight perspective, given the decline in the utilization or miles per truck, that's a key focus for us before we think about adding a lot of capacity.

And so the open truck count has seen levels that we have not experienced in the past.

And so while we've been working hard and diligently to try and fill trucks but not compromise on safety in the recruiting process to hire qualified drivers.

And so of course, as we see this inflection in rates, we have great desires to have every truck out safely running.

And so that's the primary goal right now is to -- any growth in drivers, if you will, will be to get us full that hopefully you'll see that impact on utilization.

So that's the near-term goal.

If we find that we're able to get enough rate to raise driver pay to a level that is more attractive and helps us compete with some of the other vocational jobs out there that likewise seem to be growing, but didn't take a couple of years off on wage increases like truckload and transportation did as a result of the pricing environment, then -- and we're in a position to add trucks, we will.

Right now, given how the difficult the driver environment is, it's very hard for us to forecast that as we look into certainly the first half of next year.

And for the foreseeable future, the goal is to get our trucks full.

And hey, there's nobody that will be more excited about growth when we get that to happen than us, but -- though we've got our work cut out for us.

On the Swift side, Kevin?

Yes.

On the Swift side, Tom, I would just say if you go back about 2 years, Swift is down about 1,500 trucks in that 2-year period.

A chunk of those came in the last couple of quarters as we were working through the merger, which was disappointing.

I would have been hopeful that Swift would have done a better job in that area during the transition period.

But as I said earlier, I think we've got it stabilized.

We've done some things recently that are just starting to come online that are going to be benefits for our drivers.

We increased driver pay, we've increased student pay, and we're doing a couple of other things that I'd rather not mention at this particular time that I do believe is going to help us in the driver recruiting area.

So from that perspective, I'm hoping that at Swift, we can remain flat.

But a big part of that, too, Tom, is going to be as we work through their book of business.

And I would say that about 50% of what Swift does is good and about 20% of what Swift does is okay and I would say about 30% of what Swift does probably doesn't really work.

Now the fact of the matter is, I think, we can work through most of that over the coming quarters, especially with the freight environment that we have.

So hopefully, we will be able to work through that without having to take a step backward as far as our truck count is concerned.

So those are my comments on Swift, Tom.

Your next question comes from the line of Todd Fowler from KeyBanc Capital Markets.

Kevin, maybe this is a little bit of a follow-up on your last comments.

As I think about what you have on Slide 8 for the Swift results for the 22 days, as you look at the revenue buckets, how do we think about those chunks of revenue?

What would you expect to retain of that going forward?

I think that Dave made some comments that intermodal performance improved at the end of the quarter, but how do we just think about Swift's revenue performance or what you'd expect to keep of that revenue as you move through the integration process?

Well, I would say, Tom (sic) [Todd], if I look at each of those lines, I think we should be able to maintain most, if not all of our truckload revenue.

I would say some of our dedicated revenue could be at risk, but not a high percentage of that.

I would say a fairly large portion of our refrigerated that it could be at risk, but again, I believe we'll maintain most of that.

From an intermodal perspective, I'm -- I don't think our intermodal is at risk at all.

As a matter of fact, I expect for that number to grow on a year-over-year basis.

One of the things that we're working on, Tom, as a company is really leveraging our franchise to capture share on some of our larger customers as a result of the irregular route and dedicated truckload capacity that we provide.

And thus far, we're having very good improvement.

In October, we had our biggest month that I'm aware of.

As far as empties, as far as intermodal is concerned, we're up 16% year-over-year in the month of October.

We're closing in on that magical 2.0 per month number as far as terms are concerned.

We're actively approaching the market as far as rate increases.

We're active in the spot market on the intermodal basis.

We're implementing an increasing excess for revenue and we're controlling and eliminating cost.

And so from my perspective, that's a business that I think we're going to continue to plow forward on to the surprise of maybe many on this call.

And we fully expect to eventually achieve an operating ratio in the low 90s with that business unit.

We've made some leadership changes there and our leaders there chose to exit.

Gary and I, who many of you know, has been next to me for the last 42 years, is leading that.

We're developing a new leader at Swift.

We've got a good team of people below this new leader.

And Gary's going to stay close to it and I'm going to stay close to it.

And so that's really how I see it.

Maybe back to the refrigerated business, I don't want to scare anybody.

We just -- that's just a business that really we inherited kind of in turnaround form.

And so as you work through the challenges of turning a business around, you don't really know what to expect.

But I can tell you that I'm extremely optimistic that, that business is going to operate in the low 80s.

I just can't tell you how big it's going to be and I can't tell you how long it's going to take us to get there.

I will share with you, though, that the gentleman who operated that business for many years is now there again.

As you know, when Swift acquired Central, he left, and we put him to work in one of our businesses.

And so we have him back leading that business and I can tell you, those folks out there are more than excited to have him back leading and helping.

So I'm optimistic, Tom, about the whole book of business.

But hey, as you know, as you work through change, you're not 100% certain.

But I would say I lean to the optimistic side as far as maintaining most of the business.

And so just the 30% that you mentioned in response to Tom's question that doesn't work, that's mostly refrigerated and dedicated.

You're not saying that 30% of Swift's business is going to go away.

Yes.

No, when I say, Tom, it doesn't work, it isn't great.

It may work today, but it isn't great.

And so basically our challenge is we just have to improve it.

And I think the good news is that we're working in a market where we should be able to do that, hopefully.

Your next question comes from the line of Allison Landry from Crédit Suisse.

So Dave, this is a follow-up to one of your earlier comments about sort of what it would take in terms of rates for you guys to increase driver pay at Knight.

So I was just curious how much higher either rate per mile or rate per loaded mile, whatever you think is the right metric, how much higher would it have to go in order for you to raise driver pay at Knight?

And maybe you could give us a little bit of what you're thinking a little bit of sort of color on your initial expectations for contract rate increases in 2018?

Okay.

Well, we're already there.

We're already seeing the kind of rate increases that enable us to begin to raise the driver pay.

The truth is we started to raise driver pay before we really had that rate improvement as a result of the merger.

And so we announced $0.01 stay bonus back in April and then we made it permanent when the deal closed.

So we've had -- we increased $0.01 going back to April that we've continued on and we are, with the kind of rate improvement that we've seen, as the rate of improvement has increased with each month that's gone by since the start of the third quarter, we're in a spot where we'll be -- we will be continuing to raise driver pay.

Kevin talked about a couple of programs that are going on over at Swift.

And similar things are going on at Knight.

Not every pay increases, just $0.01 across the board like we did in April.

Sometimes they come in the form of extra money for certain services that they provide or in the training world, things like that.

So that is under way and we'll continue to be underway historically.

What we've done is we've shared somewhere in the neighborhood of about 25% of the rate increase goes to driver and it's not always exactly that.

Sometimes it needs to be a little bit more given the environment, if there's some catch up and -- but it all seems to even itself out over time.

So we need to see driver wages increase fairly significantly here in the next couple of years if we want to be able to replace many of the baby boomers that the industry has been perhaps too reliant on over the last 30 years for labor.

And so we see the kind of growth in construction, the kind of growth in manufacturing and other vocational jobs and with some of the -- over the last 20 years, the decline in vocational support at the, maybe the institutional or the public education levels, we find ourselves where most every area that requires vocational labor is short labor.

And so trucking has often or for years has enjoyed a premium because of the quality of life compromises sometimes a driver must be willing to make.

So driving jobs have often enjoyed a premium over other vocational work where you would stay home.

And a lot of that premium has disappeared as trucking has had to deal with these up-and-down cycles that have made rates go flat or negative for extended periods of time.

So I think all of this number of macro factors have led us to the point of where we are today, where there's an acute shortage of drivers that is likely to just get worse as times goes on.

So we will definitely be sharing rate and that's one of the reasons why, Allison, that we feel like there's a strategic advantage with our ability to be in tune with the market.

Now I'll tell you, we're not as efficient or in tuned with the market as some of the nonasset-based players are.

There's a very large nonasset-based player that showed, based on rate per mile, that they had even more efficiency and flexibility in moving.

And so when we look at the Knight fleet, that's our revenue up, revenue per loaded mile up 4.6% versus Swift at 2%.

And yet, there are others who are leading the market even higher than that.

But our ability to move with the market in a very efficient way enables us to continue to raise driver pay at an accelerated pace in what is a competitive driver market.

Now if you, I think, snuck a second question in there about rates in the market and where we saw it kind of going forward.

When we think that the market will support continued increases.

When we look at kind of how July and August were positive on a year-over-year basis, and we probably take that for granted now, but there were positive low single digits, which was a big deal given the almost 2 years, we've had leading up to the second quarter of flat to negative rates.

But we have seen in September and continued into October a pretty healthy sequential improvements in rate.

And so beyond what you would normally expect in a fourth quarter seasonal strong peak time and also we believe that much of that is independent of some of the disruption that came from hurricane and weather, we -- this trend had started really in the middle of the second quarter and seems to be gaining some pace.

So as we look kind of through the rest of the year and into the 2018 bid season, I think it's reasonable to assume that we're going to see a bid season, that we'll have positive rates and instead of what would have been a third year of probably flat contractual rates, we may see a year that's a bit seasoned, which is closer to maybe that 5% plus potentially, which in essence, kind of makes up for 2 years of a flat.

And so -- or at least it tends to begin to make up for 2 years that have been flat.

And so as we've looked at the 2018 bid season and I think everybody's talked about it for the last 2 years because of ELDs, all of these conclusions really are independent of any impact from ELDs.

And so I think as we started the year, we would've probably anticipated, maybe even have been happy with the 2% type of environment to maybe a 2% plus bid season in 2018.

And as the year seemed to progress, second quarter, that number was probably 3% to 4%.

And as I said now, we probably look at that as 5% plus and we may view that differently as we get closer to it.

So hopefully, I answered both your questions.

Your next question comes from the line of Chris Wetherbee from Citigroup.

I wanted to ask you about productivity, I guess specifically at Knight and maybe get a sense of sort of in the third quarter or maybe parsing out a little bit of whether there were weather impacts on that or any merger potential impacts on productivity to miles per truck and then maybe thinking about sort of given the market backdrop, David, you just sort of described to us how you might think of that trends over the course of the next couple of quarters.

I just wanted to get a sense of maybe how correctable this is in a relatively short term over something that we might be dealing with for a while.

Yes.

Yes, okay.

I appreciate the question.

So the length of -- average length of haul was down 3.9%.

And so when we are actually down 4% and while -- which basically mirrored what the miles, what the miles were feeling.

And so a way to look at that is we hauled the same number of loads but we had a shorter length of haul.

And in our system here, we become less and less committed as the bid season gets more and more competitive.

And so we've had 2 counting '16 and '17 bid seasons that were highly competitive.

And so we find ourselves perhaps being a little lower on the routing guide in terms of what we win from a volume perspective.

And so yes, we're not complaining right now, given opportunities in the noncontract space that are paying premium.

And so -- and hence, you're seeing that.

I think you're going to continue to see that as a result.

But one thing that does create is some disruption in the network as we continue to see loads and lanes change hands from us to somebody else, and we pick up something that might be new to us.

And so combination, some of that switching up the combination of 3 -- or a 4% shorter length of haul and the fact that we have more open trucks, which is part of how we calculate that, we do total trucks divided by the miles.

That's what's led to it.

So as we look forward in how do we fix this, I think as we're finding more loads offered on a daily basis, then we have capacity to provide, we will work to optimize those and put more miles on our trucks.

So I like the opportunity there.

As rates go up, we have the ability to raise rates or driver wages and hopefully we can do that at perhaps a faster pace.

Still calculated and measured as a percentage of the revenue, but at a faster pace than our peers, which may help us in the idea of filling trucks.

And the third one on length of haul, if you look at our length of haul, the deeper we get into the negative parts of the cycle, you'll see our length of haul tends to shorten.

And it's because that's we go to the nasty places, we go to the tough stuff and it's where we can get yield.

And so we'll have more opportunities with the strength of the environment.

We'll have more opportunities going through bid season where we can get the kind of increase that we need to get.

So I like to think that we're going to see some progress again throughout 2018 in utilization.

Yes.

At would just add, Chris, that on miles per seated truck, we're virtually the same, like year-over-year, from '16 to '17.

So it's definitely an open truck issue.

And I would say that, hey, going through this merger, we may have gotten a little bit sidetracked doing all the stuff that we were doing.

I know that at Swift, the folks seemed to have gotten a little sidetracked.

And I would say it probably had a bit of a negative impact here at Swift (sic) [Knight], too.

But as mentioned, we've got initiatives in both businesses to really get back on track and get that open truck count headed in the right direction.

So from an operational perspective, we're producing the same on a year over basis for every seated truck, so.

Your next question comes from the line of Brandon Oglenski from Barclays.

I guess, this one's for Adam or Dave, but I'm going to come out and asked a question if I was an investor at Knight.

I'm looking at consistent expectations for earnings next year, they are up, let's call it, 45% versus this year.

And I get there were fully lapping this Swift acquisition.

But when we think about organic growth, given the tightening market, you guys were talking about better rates, better freight environment and then the structural update to improve the prior Swift business.

Should we be thinking as analysts?

I know you guys aren't providing guidance, but just some framework here because expectations are pretty high.

Should we be thinking to take organic truckload improvement and then be adding on that $85 million of expected synergies than the combined entity?

Or are there other factors that we should be considering the next year?

Okay.

Well, Brandon, I'll take a stab at that and then Dave or Kevin can chime in if they want to correct anything I say here.

Well, based on how we've answered the questions thus far around tractor count, we wouldn't factor in a lot of organic growth for 2018.

As Kevin mentioned, we're working through some of the components of the Swift business and we've seen pressure on the utilization of our tractors because of open trucks.

So we need to rightsize that before we start growing the fleet is the plan.

And so when we look at what's driving the upside for earnings in '18, that's going to be, obviously, an improving environment where Knight has historically performed well and the ability to increase yield and improve margins.

And we'd expect for that to occur.

And then, from a Swift component, there's obviously a lot of synergies that we think are out there.

We feel good about the targets that we've set out.

So we'd expect, obviously, that will impact those earning projections.

We've broken those out in our -- when we announced the merger in April where about half is coming from revenue and the other half will come from cost.

And we're making good headway on both of those areas.

And then on the cost side, it's broken up into several different components.

Some of them are much faster to be able to work through, such as leveraging our purchasing power.

Others take more time, such as safety.

And then on the revenue side, we're working towards evaluating the markets and how we can improve yields with the existing truck fleet.

Yes.

It I would add, Adam, when I think about Swift, Swift has not been a participant really in the noncontract market so -- and Swift has tended to be overcommitted in the market.

And so I really believe we have a lot of opportunity for Swift to do a better job in this rate cycle that we are in right now.

So I think just based on our experience in the business for the last 8 weeks, I think, we have a good feeling about Swift being able to leverage this upturn much better and like I say, Swift won't look exactly like Knight, but we expect that Swift will leverage the upturn significantly better than what they have in the past so -- and then from a cost perspective, there are opportunities to improve cost at Swift everywhere.

In other words, I've not seen one major line item where we don't expect to be able to improve cost.

And hey, we've spent our life in the '80 OR world.

And as a result of that, you get pretty good at what things can cost and what expense you can have on a per-line-item basis.

And so from that perspective, I believe we'll be able to add significant value at Swift.

Now some of those costs, as Adam indicated, you don't just get them overnight.

I mean you've got

[Audio Gap]

in order to succeed in that area.

But hey, we have outstanding people there at Swift and also from Knight that are working on that as we speak.

And then, hey, the procurement, that one's probably comes fairly quickly.

And some of the functional efficiency stuff will come fairly quickly.

And so it will be a mix, slight new set, the synergies will come over, call it a 2 years and a quarter period.

And so that's -- those are my additional comments.

Adam, did you have any more?

Or Dave, did you have?

I think, Brandon, talking about EPS for next year, there's a lot of moving parts.

So we plan to keep you posted and give you directionally a good feel of what each business is doing on these quarterly reports and we expect to report progress if you don't -- if they're not obvious and self-evident in the income statement on the synergy progress.

So hopefully, it will come into more clear vision for you as to how the future will look.

Your next question comes from the line of Brian Ossenbeck from JPMorgan.

Just a quick one on how you're thinking about CapEx and the fleet age.

We see that the core sleeper for the Swift is 2.5 and Knight overall is about 2.7.

So do you think you need to step up some of the replacement cycle, perhaps, to be more competitive in terms of attracting drivers.

I know maintenance cost have been running up a little bit on the legacy Knight before the merger.

So I just want to get a sense of how you were thinking of balancing that through this year and then into 2018 against the driver backdrop.

Yes, sure, Brian, I'll take a stab at that one.

So yes, the Knight fleet is 2.7.

It's the oldest we've been in quite some time and our plan is to invest in the fleet and to refresh the tractor age.

And we expect to see that in the coming quarters as we already have some orders in place that will allow us to do so.

I think we have a similar strategy on the Swift side.

I think they're about 2.5 years on their core sleeper fleet, and we would again invest in some equipment there to lower the average age of Swift.

I think the CapEx numbers, we're still working through that.

I think we've given the guidance for that today.

There may be some different strategies that we take, particularly on the Swift side.

I think at Swift, historically, they've made some that they purchased with cash out of their line of credit.

They've done quite a few capital leases and quite a few on operating leases as well.

And so we may take a different approach than they have historically, which make that CapEx number look a lot different in what it has historically been.

I think we're committed to refreshing the fleet.

We're committed to investing in technology into the trucks.

We think that we have the balance sheet to allow us to do so.

We think that's part of our strategic advantage.

And so we'd expect to have maybe some better clarity for The Street, maybe in the coming quarters in terms of what that number may look like.

Yes.

And I would just add.

Basically, all 4 major OEMs now have made the leap as far as to new chassis, fuel efficiency, safety technologies incorporated into.

And so really going forward, we've got a lot of good choices and we'll be working through that.

But yes, you'll see more invested in both the Knight fleet and the Swift fleet in the coming quarters.

Your next question comes from the line of Jason Seidl from Cowen.

I wanted to focus my questions more on your brokerage business, I mean you had double-digit top line growth.

Actually, some decent year-over-year gains in your gross margin.

Can you talk a little bit about what's going on there in the quarter, how much of it might have been related to just the burgeoning spot market and what we should expect going forward, in that division?

Sure.

So Jason, the brokerage business for us has always been predominantly in that noncontract space.

So it's been a little bit challenging for top line growth over the last couple of years, in the absence of making broad-based commitments.

And so that business, we've worked very hard now for more than a decade on building a solid portfolio of third party carrier partners.

We feel like we have some things we can offer and some understanding we have by running trucks ourselves but maybe the traditional broker doesn't offer.

And so we work hard to develop strong relationships there.

We've invested heavily in technology.

On the Knight side, there hasn't been a bigger investment in technology than in our brokerage space.

And so we're starting to see some of that, we think, bear fruit.

And so you saw a gross margin in that over 16%, 16.3% range, which with our cost per transaction helps us to be in that nice low 90s number despite being a relatively small business and not as large as we expect it to be someday to spread out some of that overhead cost.

So this is a business that we expect to grow and we expect to grow it because we expected to do brokerage with all of our customers.

And virtually all of our customers, both on the Knight and on the Swift side, find the need and take advantage of the opportunity to use third party brokers to go and work with a very large vast group of carriers because oftentimes, that can be the optimal way to move a load and oftentimes it's a great way to handle surge freight and seasonal freight.

So we don't view it as optional or extracurricular.

We view it as an important part of the offering that we provide to our customers.

And of course, in such an asset-intensive business, we really need some of that high return on invested capital business to help us make the kind of capacity commitments and capacity investments that our customers really want us to make long term to help them.

So this is something that is well ingrained, I would say, on the Knight side.

And I think on the Swift side, it is a huge priority and I think we have found a lot of support in the Swift side, and maybe Kevin could speak to it a bit more.

Yes.

I would just say, Jason, that basically, Swift has had multiple leaders in that business line over the last 7 or 8 years, and kind of each one of them had their own ideas, but nonetheless, Swift -- that's an area where Swift's never really gained traction.

And so we now have that business as being led by a former Knight employee that helped us develop and grow our brokerage business here.

And so I mean, that is definitely going to be a massive focus for Swift is to really develop our line capabilities, develop our carrier relationships, develop our customer relationships as far as having that opportunity to not only provide them a capacity that we own, but also capacity that we source.

And this should be a major area of growth at Swift, and really not nearly enough of our Swift customers give us significant opportunities on the brokerage side.

And I'm not really sure we've been ready to really receive those.

I mean, we -- I don't want to point the finger to our customers.

I mean, really, at Swift, we have not gotten ready to do the things that we need to do in order to be a serious contender for that business.

But I believe that, especially as Swift focuses more on the noncontract market as well as the contract market, I do believe, Jason, that, that's going to be a really positive area for us at Swift, so.

And in terms of the gross margins going forward, should we expect continuing improvement given that you're mostly playing on the spot market and that the market's sort of up and to the right, right now?

Yes.

I think we're in levels that historically we've not been much higher than this.

And so hey, we would love to see that, but hey, there's an appropriate margin for brokerage and it's in that mid-teens, we think.

So we're not going to be overly bullish on that.

We want our customers to give us opportunity to provide good value for them so.

The last question from today comes from the line of Ken Hoexter from Bank of America Merrill Lynch.

Just now that you're through the door, Kevin, you'd talked about the synergy potential with Swift.

Is there any potential to, I don't know, upsize that?

Are you hesitant to do that given the step back you noted during the merger period?

Was it too big to overcome?

Or again, is there potential to merge any more of the back operations than what you thought when you stepped through the door?

Maybe just give us some insight on the synergy side.

Yes.

So really, Ken, we're not in a position today to upsize the synergies, but hey, I sure hope we are as we progress through the process.

And as far as merging the operations, there'll be no merging of the operations.

The operations will remain separate.

But there are areas that are not customer-facing and that are not driver facing that we can gain some synergies from.

And one area that just comes to my mind all the time is just technology.

I think that we've got a really good team here at Swift.

And as you know, we have a good team at Knight, and I think we can accomplish more.

We're kind of working on some of the same stuff and -- but as we figure out how to work together, I think, we can get all that good stuff done faster and then get even more good stuff done.

So that's an area that comes to mind.

But Ken, overall, I'm optimistic when I've looked at the operating numbers on a per business basis over the last couple of quarters, I really feel like we're going to do really well as far as synergies are concerned and we're getting good things done every day and there's not a day that goes by or a week, I should say, where something positive doesn't come out of the work that we're doing.

So I'm optimistic that we're definitely going to hit our goals as far as synergies.

And yes, I hope that we can deliver more and that will be our expectation.

Thanks, Ken.

So that will conclude our call.

We appreciate all of you who joined in and your interest in our company.

Take care.

This concludes today's conference call.

You may now disconnect.